Capital gains taxes are expensive. If you’ve ever sold property, you know that it can be a scary sight to get a capital gains tax bill. How scary? Let’s say you purchased property at $385,000 a few years ago and when you sell, it goes for $450,000. If your property is in Atlanta, Georgia, your filing status is married and your annual income is $150,000…you’ll owe approximately $14,220 in capital gains tax.

But, there’s a silver lining called a 1031 Exchange. What’s that? It’s basically a way to defer paying the capital gains tax until many years later when you decide to "cash out" your investment. In essence, a 1031 exchange is a swap of one business or investment asset for another. It’s usually referred to as a ‘like-kind’ exchange.

When dealing with real estate, 1031 exchanges allow you to sale a property and buy another property without paying any capital gains tax. This is great, right? Yes, but there are a few things to keep in mind.

1.1031 Exchanges don’t apply to personal property…for the most part.

These exchanges are only for investment and business property. A person cannot sell a primary residence for another.

2. You must designate replacement property.

When you sell your investment property, you have 45 days to designate a like-kind replacement. In the meantime, an intermediary must hold the cash from the sold property.

3.If you receive any cash, it will be taxed.

If you don’t have an intermediary, third-party, to hold cash for you during an exchange, you’ll be taxed for that amount. This includes cash that you profit after an exchange.

4.Consider loans and mortgages.

Is one property valued more than the other? This could result in profit. Be sure to consider all scenarios that may arise in your 1031 exchange.

5.You must close within 6 months.

You have 180 days to close on the replacement property after you’ve closed on the sale of the original property. This runs concurrently with 45 day rule of a delayed designation.

1031 Exchanges can definitely be complicated, but The Ruffin Firm can help you navigate the process. Give us a call at 470.344.5943 or schedule a consultation.